I saw this morning that President Bush outlined a plan to reform the subprime mortgage industry and outline plans to help “Americans keep their homes.” I have been very interested to watch this whole real estate mess play out over the last year.
I have read so many stories about individuals caught up in the mess. Here is a typical story: One couple lied about their income, did not document it, and received a big interest only loan that will reset in a few months. Now they are scared as they cannot afford the revised payments and will lose the house. They said that when they purchased the house they figured they could refinance or their income would go up or the house value would go up – none of which occurred. They blamed the mortgage broker for lying to them about house values going up and did not appear to take any responsibility for the mess. This is typical of the many stories I have heard. It is sad to hear about people who have waited for years to buy a house only to lose it and I have no doubts there are a lot of sleezy mortgage brokers out there who will lie, cheat and steal to sell a mortgage. I have experienced the foreclosure process a few times firsthand growing up as a child (my family lived in 20+ homes in my 12 years of school through High School).

The challenging part for me is to figure out what the government’s responsibility should be in these cases. Should the Government bail out these homeowners or let the market figure things out? If the Government acts to help these people in some way, it would cost untold of billions of dollars that eventually end up as a subsidy to big banks. I also realize that these people are in their respective situations because of the choice they made to buy the house under unrealistic scenarios. What would Gospel Principles advocate? This gets sticky for me as we are told to show mercy, but yet let people suffer the consequences for their actions. So I am left in this push-pull, not really sure what the right answer is, besides fix the underlying problems in the system so this won’t happen again. (although I do lean to let the market figure things out)

I’ve been thinking about this a lot, too. On the one hand, I think it is disastrous in the long run when the government insulates people from risk in situations like this–if you build a house in a hurricane zone, FEMA shouldn’t bail you out. And if you sign on to an ARM, the gov’t shouldn’t bail you out.

On the other hand, if five houses on my street go into foreclosure, there’s no way I’ll be able to sell my house (if I had to) and *I* would end up paying a huge financial price for that. So why is that fair to me?

I am amazed that people were taking out adjustable rate interest only mortgages for the last few years. We’ve had relatively low interest rates during this time, so it was a great time to lock in a traditional 30 year deal. The whole ARM business is playing with fire. The sad thing is that some people got lucky and came out smelling like roses. They bought early with an ARM, paid very little in house payments, and then sold when the market was high and got a big chunk of appreciation. Others see such examples and dive right in, hoping to also get something for nothing.

Even dumber are those that were not paying their mortgage down, and then took out a second mortgage (on their appreciation) when the rate on the first adjusted. Now they’ve got a short term bundle of cash and two payments they can’t afford.

If you can’t afford your house you need to sell it. Sooner rather than later.

I keep hearing stories about people feeling like they’ve been scammed, and I don’t doubt that some people were scammed. But if they were, they should have the paperwork to prove it. I do know that mortgage brokers have been pushing people to non-traditional mortgages because they get a higher commission from them. So some that qualified for a 30yr fixed neer got offered one. But in the end, isn’t it the consumer’s responsibility to become informed about their options?

I’ve said for a long time that you shouldn’t be able to graduate from high school without a one year course in personal finance that would teach budgeting, credit (both cards and loans), and basic investing.

I purchased my first house last year during the subprime craze. Every mortgage lender I talked to was pushing me into ARMs or interest only loans. Most of them before they even ran credit checks. â€œGotta get the ARM, youâ€™ll never see interest rates this low again.â€ Yes I have okay credit, not great, but Iâ€™ve heard of and seen a lot worse. A year ago (and Iâ€™m sure further back then that) the mortgage lenders in my area were primarily pushing the ARMs and interest only.

I told my wife, and every single one of the mortgage lenders that I would ONLY accept a 30 year fixed loan. My wife and the lenders both said â€œwell a 30 year fixed will cost you moreâ€ and I said â€œnot in three years when the ARMs start going up and subprimes start foreclosingâ€. Wife listened to me, mortgage lenders didnâ€™t believe it would happen.

Finally one of them (I think the fifth) actually listened and didnâ€™t even try to work out an ARM. Got the loan no problem after a mortgage lender actually bothered trying.

Point being in all this is that I hold the mortgage lenders equally culpable to the borrowers.

Devyn,
I’m not complete sure I subscribe to a desserts-based system (i.e., they acted bad, so they deserve whatever comes to them) (they meaning the borrowers, not the lenders Trevor mentions). But even if the borrowers deserve to be foreclosed upon and lose their homes (or, even if they don’t deserve it, but it ought to happen anyway), there are wider repercussions to this whole thing, and the federal government may be concerned with preventing those things.

Not all of these things will happen; maybe none will. But ultimately, the subprime collapse could negatively affect a lot more people than those who foolishly took too-expensive ARMs; it could easily (negatively) affect me and you, in spite of the fact that I’ve never owned a house and have been hoping and wishing that the housing bubble collapses so that I can join the club.

Saints ought to be anxiously engaged in helping one another. If the Amish can build barns in a day for their co-religionists, and the fundamentalist Mormons can build homes for each other with donated labor and interest-free loans for building supplies, why cannot our 13-million member LDS church cooperate and help each other avoid home loans altogether? This is not a rhetorical question.

Of course, I know, I know: it is a big enough sacrifice for three or four members of the Elders Quorum to show up to help someone load up a moving van, and we consider ourselves to be building Zion when we merely show up to do home teaching at least once a year.

But maybe “Building Zion” actually involves *building* Zion, and we ought to be more anxiously engaged in helping create thriving communities of homes built without plunging the Saints waist-deep into usurious loans that serve only to drain Zion and build up bankers.

I once filed a bankruptcy for an elderly couple living in a mobile home park. Both were quite uneducated, had worked in manual labor jobs all their lives, and now were living off social security and meager pension benefits.

They had far too much unsecured debt, and over 80,000 in secured debt on the trailer. They had seen the property value on the mobile home drop from the original mortgage amount of over 80,000 to a mere 60,000 in value on the property over the course of several years. The investment was gone, they couldn’t afford payments.

They ended up moving into a retirement home.

With only meager pension and social security benefits, I’m very worried about whether they can afford to pay for their future. What if one of them gets sick? Will Medicare cover it?

I don’t know. I’ve seen too many seniors for whom Medicare has not covered their medication needs. Will they be able to afford their rent? The pension they are drawing just isn’t that much. I can only see it going so far.

Now they have no cushion of home equity to fall back on if their situation takes a turn for the worse. And both are very unsaavy and not financially literate. What if they fall for a poor investment, or scam? What if they get into a financial pinch and take out a bad loan?

To say these people, and the millions like them in America, were stupid, is no kind of useful response at all. So they were stupid. Now what? Just let them die on the welfare system?

These kind of “I told you sos” may make GOP blowhards feel good about themselves, but they solve nothing.

Mfranti: why should people be resigned to renting, and enriching someone else? I realize that for the longest time only the wealthy have held property and the poor folk rent (all the way back to medieval times), but–fundamentally–is this right? Is it something we Saints should just accept: namely, that it is the job of the poor to pay their meagre earnings as rent to a landlord who gets ahead while the renter just barely plods along?

The ARMs enticed many marginal people into actually living the dream of owning their own home and land. It is a fundamental desire of most people to not be beholden to someone else for their homes. Unfortunately, usurious lending practices that have become so common actually leave these “poor” people beholden to the banks, who are usually far crueler than any landlord. It is a lose-lose situation for the working class.

Which is why, as stated above, we Saints who are striving for Zion ought to be willing to strive a little harder.

mfranti: the people in their 20s and 30s who buy more house than they can afford often do so because there are no houses they can afford! Unless you live in Podunkville, Nebraska (try finding good employment for you and your family there!), a 20-something couple likely will find it nigh impossible to afford a home on a single income (have to be able to factor in the single income, because if they are going to have children with whom one parent will stay home, then they can’t count on two incomes for the better part of two decades).

In my city, a three bedroom condo, squished in with hundreds of others, in a marginally bad part of town, costs nearly $200,000. Single family homes with a yard start around $300,000. So you either buy more house than you can afford, or you rent (for most folks).

And how can they afford to buy a house later when they are paying rent, which as Seth notes, is just wasted money (not entirely wasted, in the sense that they do receive shelter for the month they pay rent, but indeed waster in that it builds no equity and doesn’t move you ahead of where you are).

Point being in all this is that I hold the mortgage lenders equally culpable to the borrowers.

This is an excellent point. We keep talking about how the homeowners are guilty because they accepted such risky loans, but really, would they know about those risky loans if it weren’t for the mortgage lenders who kept pressing them?

I don’t mind helping out those who were bamboozled into bad loan deals. But I think we should punish those who kept pressing the risky loans, all for the love of money of course and not in the interest of both parties.

no, I am not suggesting this at all. in fact I think it is a very bad idea. a very very bad idea. but the choice comes down to either buy a home or rent. renting is seen as throwing money away (partially right) and buying is very difficult. and even the church says that buying a home is a correct reason to take on debt.

for the record, i never advocate buying anything someone can’t afford. but the LDS people and others who do so often have no other choice if they wish to own a home and not throw away their money on rent. Not advocating, just stating the scenario as it exists.

Seth and Ben There, you seem to be doing your part to stigmatize renting and drive socially insecure into buying when they would be better of not doing so. For the past three years, I’ve been renting for less than the interest would cost on a mortgage on an equivalent property. Rent is not wasted money; it gives you someplace to live for this month.

Also, Seth, I am glad you remind us about the downtrodden who stream into your office, but that’s just one part of the picture, and maybe not the most significant. A bit like a doctor who thinks the world is full of sick people, because that’s who keeps coming to see him. I glanced at an item in the WSJ at lunch showing that 20% to 30% of foreclosures in hot states like Nevada and Florida are investor properties, not owner occupied.

Actually John, I was just trying to explain why a bad loan can seem like a rational choice over renting. It’s important not to assume that the options will look the same to poor people as they look to us. Also, you cannot look at one set of choices in isolation from the other choices and realities facing these people.

Interesting discussion all. I would agree with mfranti on the point that if you can’t afford it then don’t buy it. However, as Seth and Ben There point out it does resign us to have a class of wealthy landowners. However, with all things being cyclical, the price of housing will either come down or stagnate allowing people to be able to afford a house – something like 70% of families own a house so it is not all dire. I am a little confused as to what Seth and Ben There are advocating – if you can’t afford the house then how does it get paid for?

John Mansfield: You will note that I said calling rent wasted money is only partially right, for precisely the reason you mention: it gives you someplace to live for the month. It is only wasted in the aspect of it not getting you ahead. I am sorry if I was unclear.

For the record, at the present time, we rent. We rent an awesome house in an older, nice neighborhood, for a sweet price: less than the interest would cost us, just like you. I am not knocking renting: it has its place. But I do feel a bit depressed sometimes thinking about how our rent money just goes into our landlord’s vacation fund (which he has told us) instead of toward building our own ability to be self sufficient.

But I can tell you one thing, the collapse of the housing market is very much a factor here. People are simply unable to sell their houses and are watching their home equity steadily disappear.

While the subprime mortgage market was the market that collapsed, it has spilled over into the prime mortgage market with disastrous consequences. Home values are plummeting across Colorado and in markets across the US. Analysts are saying that housing markets that are temporarily shielded from the effects of declining home values will not remain shielded forever. This affects everyone.

So not only do the bad lending and borrowing practices of the last couple decades affect those who are immediately getting burned right now, it’s destabilizing the entire American middle class – smart borrowers right along with dumb borrowers, legitimate lenders right along with sleazy ones.

#5 Ben There – thanks for the laugh. I was waiting for someone to bring that up…

Trevor – that is a bit scary and is an example of how pushy the brokers were.

Seth – these situations do keep you in business… :)

I think that everyone has teed up the issue here – someone wants to buy a house in a very expensive area and can’t afford it with a traditional mortgage so they get a mortgage that allows them to have the house for a period of time but at the end of that period they can no longer afford it and they likely owe more on the house that it is now worth – what are they to do? I guess walk away as I am not sure the government can do anything for them as sad as it is.

So not only do the bad lending and borrowing practices of the last couple decades affect those who are immediately getting burned right now, itâ€™s destabilizing the entire American middle class – smart borrowers right along with dumb borrowers, legitimate lenders right along with sleazy ones.

mfranti, I guess I should explain how a subprime mortgage can actually work:

The borrower goes to the subprime mortgage market and finds a lender who isn’t too concerned about his poor credit rating and lack of income and applies for a mortgage. Since the borrower is a bad credit risk, he can’t expect a prime mortgage with a reasonable fixed interest rate and workable payment plan. So instead he gets a subprime loan with an adjustable rate mortgage, and say… a 50 year repayment plan (I kid you not, these lending packages were really popular around here as recently as last year). The mortgage payments are typically very low to start with and most plans require either little or no downpayment.

Now, 50 years sounds ridiculous (probably because it is). But the borrower has no intention of staying in the house that long. Their intent is to stay perhaps 5 years and then cash out in a booming housing market with a tidy little profit that they can then apply towards a better lending arrangement in a more long-term home.

If they manage to accumulate some home equity, it can be borrowed out in a second mortgage which will allow them to increase the value of their “investment” (home improvements) or allow them to make those increased mortgage payments (remember how I said this is an “adjustable” rate mortgage?).

And in the meantime, you get to live in a nice slice of suburbia instead of that roach infested apartment complex downtown.

Very risky. As long as the home buyers market is booming, this scheme can actually work. But the moment the housing market takes a downswing, it starts netting all sorts of foolish borrowers. Of course, such downswings also tend to correspond with higher payments on those adjustable rate mortgages and lenders start to get more gun-shy about their investments. Once things start going bad, they also have a tendency to spiral out of control and just get worse and worse. The whole house of cards comes crashing down.

But back when the market was nice, it looked like a good idea for people a little too wrapped up in short-term thinking.

It is amazing that it is just like the internet bubble of 7 years ago. All things are cyclical and this one will likely drive us into a recession causing all sorts of pain and grief – primarily for the middle and lower classes, then the next bubble will hit – perhaps it already has in ethanol. Then the poor and middle class will chase that bubble and get destroyed again. Not a nice cycle – seems a little Book of Mormon like.

The whole housing mess is a simple result of:
(1) Greenspan wanted to keep the economy humming even as the dot-com stock market crashed, so he lowered interest rates;
(2) the lowered interest rates allowed people to buy more house for the same amount of money, so house prices went up;
(3) savvy people saw that house prices were still going up, even though stocks were tanking, and rushed to the housing market;
(4) the rest of the country bought into the notion that “housing only goes up” and the resulting demand caused an unprecedented and unsustainable spike in housing prices.
(5) interest rates go back to normal ranges (still historically low, though), simultaneously easing demand and increasing owners payments.

Smart people saw all this happening and decided to rent. Over the last three years or so, buying rather than renting only made sense if you assume upwards of 10% appreciation per year. Unless you’re in a period of insane inflation (including wage inflation) that is just a ridiculously foolish assumption to make.

The solution is for home prices to go back to their historical and fundamental association with wages. In other words, logically home prices should not exceed wages (i.e., inflation) by more than a percentage point or two. It would be very painful, especially for people who bought in the last few years, but it would get us back on economically sound footing.

Here’s an easy way to decide what lenders to bail out and which ones to punish. Go back over their records and determine whether they offered people loans that were substantially worse than what they qualified for. I would guess that a pattern will emerge and you’ll see who the unscrupulous lenders and mortgage brokers are.

Most people won’t get foreclosed on, they’ll just have to live up to the contract they signed and pay more for the house than it is really worth. I don’t feel bad for them, anymore than I feel bad for other people who freely choose pay more for something than it is worth.

People who are foreclosed on will have to move and rent, which they should have been doing all along. I don’t feel bad for them either.

Devyn: I bear you no malice or ill will, truly! My comment was meant as a playful “salute” to an all time MM classic post. I doubt any bloggernacle post will ever exceed the 635 responses you generated. A good blog post generates a few comments and scattered applause. A *really* good blog post generates actual discussion and stimulates thought. You did that very well with that post. You should be proud of it. Cheers!

I bought my house in 1979 for $30,000. I got it through Farm Home, qualifying to buy it with no money down, and I paid the closing costs. I did not receive any interest subsidy, just the no money down part. By the time the loan closed, my house was worth $35,000.

I married Bill, he moved in and we struggled to make the payments and raise our kids. It was not always easy, but we did it. Our house is nothing wonderful (it is to us :)), but our kids love it. To them, it is home.

We’ve re-financed three times, I think, twice to re-model and once to get a lower interest rate. We still have a low rate, I think it’s 6.25. We put two bedrooms, a family room, and a tiny bathroom in the basement. Re-did the floors, the kitchen and the upstairs bathroom, painted, etc. etc. Planted trees, put in a fence.

Our payments now are higher than ever, although we hope to pay it off in five years.

As far as I’m concerned, this junky house (you wouldn’t believe the condition when I moved in, holes in the walls, Farm Home had to make them clean up a bunch of crap–garbage all over the lawn) is a gold mine.

I estimate that, counting Bill’s nice shop in back and the really nice wood fence (to the tune of $8000), our house is worth at least $200,000. I know it would be more in some areas, but that’s the median price here.

I’m very grateful for the government program that made it possible for me to buy this home. It’s meant security to me after my transient childhood. I never took advantage, but I’m glad I was given the advantage. If you know what I mean.

I think we live in perilous times. Credit, all kinds of it, tempt people. I feel sorry for the people you mention, Devyn–not to the tune of bailing them out. But because they don’t realize what a gift they were given when they bought their house and don’t have the backbone to do everything in their power to keep it.

Actually, I feel sorry for all the young people just starting out today.

I’m becoming more socialist as I get older. I think people should be given every opportunity possible. Not a handout. And if they can’t do their part, no I don’t believe the government should pay their bills.

And, if big banks go under, who suffers most? A few bank execs? Hardly. How about the retirement accounts of millions of Americans who have invested in those banks.

So is a bailout of the banks the only reasonable thing the government CAN do, in light of the domino effect that goes into play as soon as banks start falling and taking with them hundreds of thousands of middle class Americans, investors, and numerous other casualties?

Ditto to #42–and that is why we chose not to buy, but rent in the Bay area. It ticks me off that the government is now allowing people to get out of ARM’s by backing up a new mortgage for them. Gee, if I had known the government would make it so I could buy the median house in my town at $610,000 and get a better deal than was being offered, maybe I would’ve jumped too.
In my area almost 1/2 of mortgages have ARM’s. This was all sooo predictable, and that is exactly why we didn’t buy. We rent and invested our extra money elsewhere. So many people told us to buy–and now we see lots of our friends in financial trouble because of their over-eagerness to buy a house that they could not afford, and invest in real estate unrealistically. I honestly feel really bad for them. However I don’t think the government should fix it all–but they sure could have and should have prevented it. I really am sick of people saying that ARM’s are the only way to buy a house here, and everyone should buy a house. If ARM’s weren’t so readily available, people would not have purchased the houses, pushing the market back and preventing the bubble. The homes would have had to stay much more affordable and prices would have risen at the normal steady rate of 1-2% per year, instead of 10-15%.

On another note, there are easy to find rent vs buy mortgage calculators online.

living in los angeles this has been a huge deal for me. for at least 3-4 years know i’ve believed that prices were too high and had to come down, but was continually frustrated and perplexed upon seeing them continue to go up 20%+ per year. i’m at the age where i should be in a home already, but you couldn’t find anything in a neighborhood you’d want to live in for anything less than $700k.

i really lay the blame at wall street and the mortgage lenders and government regulators. most regional markets should have peaked around 2004, but due to the insatiable demand for MBS’, CDO’s, etc. by institutional investors wall street basically told the lenders to go crazy and drop all lending standards, resulting in products like 1 and 2 year ARMs, interest-only ARMs, 100%+ financing (in case you can’t even scrape together closing costs), option ARMs (don’t even pay all of the interest, we’ll just tack it onto the principal), and worst of all, no doc loans (sure, just write down here on the application what you make and we promise not to verify it). because nearly all of the lenders didn’t hold the loans but merely sold them off they didn’t feel the risk like they did in past booms.

that’s when prices started to really go crazy. how any rational person could look at that and not see that it was going to end badly is beyond me. and although it was nice for a lot of people the country to see their homes rise in value, we would have been much better off w/ more moderate, steady growth in prices than a bubble and crash. that’s where the gov’t comes in. they needed to step in two or three years ago and regulate the mortgage lending industry more tightly since it was painfully obvious that they weren’t going to regulate themselves. but now instead we have a cluster***k that’s going to take years to run course and cause a lot of collateral damage in the process. a recession is pretty much in the bag.

there is definitely a moral hazard involved w/ any kind of bailout, but the gov’t will have to act like it’s doing something or people will revolt. personally i’d like to see the market work itself out w/ the gov’t putting regulations in place in order to keep this from happening again. any intervention will likely only prolong the recovery. besides, most bailout plans are ultimately aimed at propping up values, but that’s exactly what we don’t need. and i think that the problem is too big and too expensive for the gov’t to be able to do much anyway.

the housing market will not be healthy again until we see significant declines in value (especially in places like los angeles) bringing values more in line w/ what incomes can afford.

as for renting vs buying, i get really tired of people saying that renting is “like throwing money away.” like a few said in previous posts, whether paying a mortgage (along w/ property taxes, insurance, HOA, etc.) or rent, you are mostly paying for shelter.

the main benefit of buying, especially if you use a fixed rate mortgage, is that you lock in a monthly payment (although your taxes and insurance will likely rise w/ inflation) that coupled with inflation and and likely rising wages over your lifetime, will make your house payment relatively smaller year after year.

however, lately the problem is that over the past few years in a lot of markets, you can rent something for a whole lot less than you could buy the same place. here in los angeles i would estimate that you’d pay at least double what you pay in rent to buy the same place (assuming you’re paying a fully-amortizing mortgage). and if you’re using an interest-only loan your basically just renting money instead of a house. either way you’re throwing money away so to speak.

right now if you’re not a homeowner you’d be much better of to rent at much less than the cost of ownership while waiting for prices to go down. why on earth would you want to pay more per month to own a depreciating asset than pay less to just rent it?

if anyone is interested in some really great commentary on the housing and mortgage markets, or just wants to understand what’s happening in great detail, there’s a wonderful and well-written blog called calculated risk that you should check out.

When I moved to southern California three years ago, everyone was telling me to wait until all the interest-only home loans people had taken out to buy houses changed and they weren’t able to afford their payments, because then everyone will be trying to sell and prices will come down. (If people knew this years ago, why wasn’t anything done about it?)

Prices are coming down a tiny bit. Instead of $700-750K, we’re seeing $650-700K. Well, maybe not, I haven’t paid that close attention—it depends on how big the house is. I’m sure many are still listed at $750.

We see so many houses for sell everywhere, it’s crazy. And we keep asking ourselves, who can afford these houses? I don’t get it. The people I know who own homes here bought them years ago when they were still affordable. Who’s buying homes now?

not very many people. and as it looks like the lenders are quickly retreating to the lending standards of yesteryear (document income and assets, require at least some down payment in order to get a decent interest rate) your going to see sales drop even further down here. give it a few years and houses will be much more affordable, there’s really no other plausible outcome from this.

God commands me, individually, (and you individually) to show mercy (and to do good). To my knowledge He has never command us to force our neighbor to show mercy (or to do good).

If you want to show mercy to these fools, then go ahead, that is your right (and responsibility – if you accept God’s commands). However don’t hold a gun (i.e., taxes) to your neighbor’s head to force them to do likewise.

Daylan – Not sure where you are coming from – it sounds like you think people who are in foreclosure are all fools. That is a broad brush to paint – perhaps some of them were foolish, others were duped, while others have likely lost their jobs, etc. So be careful who you are calling foolish as these are people with real lives that are being put into disarray. I don’t think a bailout is likely nor feasible, and the market will correct itself.